Baker & McKenzie – A little over a month ago, the Treasurer announced that temporary measures put in place by a determination instrument in May 2020 to relax provisions in relation to continuous disclosure would become permanent by enacting legislation.
In his press release he stated that the objectives of this legislation were “so companies and their officers will only be liable for civil penalty proceedings in respect of continuous disclosure obligations where they have acted with “knowledge, recklessness or negligence”. This will discourage opportunistic class actions under our continuous disclosure laws. The bill also makes clear that companies and their officers are not liable for misleading and deceptive conduct in circumstances where the continuous disclosure obligations have been contravened unless the requisite “fault” element is also proven … These changes strike the right balance between ensuring shareholders and the market are appropriately informed while also allowing companies to more confidently make forecasts of future earnings or provide guidance updates without facing the undue risk of class actions.“
Directors breathed a collective sigh of relief. The AICD cheered the news. CFOs dreamed of reduced D&O insurance premiums. Class action litigation funders and lawyers were despondent. Investor groups began agitating, declaring that this took away fundamental investor protections.
This rallying cry was embraced by the Labor party who refused to pass the legislation enacting the continuation of these protections. The existing protections expired on Monday, 22 March 2021. So now, companies and their directors no longer have the benefit of these protections and will be subject to the old continuous disclosure laws that applied before May last year.
Unfortunately, most of this battle has been fought based on press releases rather than the legislation itself. So it’s helpful to clarify what actually was proposed, the implications of those protections not being enacted and what reforms could be put in place in the future to achieve the Treasurer’s stated objectives.
The May 2020 changes to continuous disclosure obligations under the Corporations Act were welcomed by listed companies and their boards. The changes were intended to provide some protection to companies and their directors from potential civil claims for breach of continuous disclosure obligations. These changes, coupled with some further protections from class actions involving litigation funders, did provide some comfort for companies and their boards.
These temporary continuous disclosure changes were largely replicated in the proposed legislation and focused on when information is materially price sensitive and must be disclosed. The legislation would have permanently changed the standard from an objective measure to a more subjective analysis, so that rather than information being materially price sensitive if a reasonable person would expect the information to have a material effect on the price or value of securities, directors could have made a more subjective judgement about this, unless they knew or were reckless or negligent as to whether the information was materially price sensitive.
After Monday the more objective reasonable person standard applies again, so there is no need to prove any fault element that directors knew the information was materially price sensitive and should have been disclosed or that they were reckless or negligent. So companies and directors will need to take a more rigorous and objectively focused approach to decisions about continuous disclosure as they face a higher risk of potential civil claims. These kinds of decisions remain difficult given the uncertainty of the COVID impacted business environment, particularly when the fiscal impact of JobKeeper ceasing remains unclear.
The May 2020 changes really only provided protection in relation to decisions not to disclose information under the continuous disclosure regime. These changes were criticised for leaving companies and directors exposed to claims for misleading or deceptive conduct for making disclosures. They were also exposed to claims like those made in the Myer case that by failing to update the market as required by the continuous disclosure rules, Myer had misled or deceived the market.
The Treasurer’s recent press release referred to tackling misleading and deceptive conduct issues. However, the legislation as drafted was convoluted and didn’t really achieve this objective. The proposed changes only really provided that a failure to disclose, in circumstances where there wasn’t knowledge, recklessness or negligence, would not of itself be misleading or deceptive conduct. This would have covered claims like those made in the Myer case.
However, the proposed changes would not have protected a company or its directors if the company actually did provide guidance or made disclosures to the market which turned out to be inaccurate. Such inaccurate disclosures would still have exposed companies and directors to potential liability if they were misleading or deceptive or, in the case of guidance or other forward-looking statements, if there wasn’t a reasonable basis for making the relevant statements. Contrary to the Treasurer’s press release, the changes wouldn’t have allowed “companies to more confidently make forecasts of future earnings or provide guidance updates without facing the undue risk of class actions“. Yet concerns about the perceived loss of investor protection in relation to misleading and deceptive conduct seemed to be at the heart of some of the more strident criticism of the proposed legislation.
Since the Myer case, many listed companies have upped their game and enhanced their continuous disclosure policies and processes, and boards have escalated continuous disclosure issues to be a key item considered at board meetings. ASX’s revamped Guidance Note 8 provided some helpful and pragmatic guidance for companies to deal with their continuous disclosure obligations, particularly in relation to providing guidance and avoiding earnings surprises and disclosures regarding the impact of COVID. The relaxation of continuous disclosure obligations assisted in creating an environment where companies and boards had more comfort in making decisions about continuous disclosure and complying with their obligations, and it seems sensible to extend that regime permanently.
At this stage, the proposed legislation has not been passed and may therefore be up for consideration again later in the year, perhaps in August. Hopefully at that time there could be a sensible debate focusing on the real effect of the legislation rather than the rhetoric. Further, to achieve the stated objectives of encouraging companies to provide more forecasts and guidance, consideration should be given to providing some similar protections for information that is in fact disclosed, so that the misleading or deceptive provisions would not apply to disclosures made in good faith, unless the company or its directors knew or were reckless or negligent in relation to the accuracy of the information.